Explanation

A Forward Rate Agreement (FRA) 2 × 5 represents a forward contract that starts in 2 months and ends in 5 months, with a total duration of 3 months (5 - 2 = 3).

Understanding FRA Notation:

• FRA m × n means the contract starts in m months and ends in n months
• The underlying loan period is (n - m) months

Long Position in FRA:

• A long position in an FRA means you are locking in a borrowing rate
• You are effectively agreeing to borrow money at a fixed rate starting in the future

Equivalent Spot Market Position:

• A long FRA 2 × 5 means you want to borrow money starting in 2 months for a 3-month period
• This is equivalent to: Borrowing in two months to finance a three-month investment

Why other options are incorrect:

• Option A: Incorrect - This would be borrowing for 5 months, not 3 months
• Option B: Incorrect - This reverses the timing and duration
• Option C: Incorrect - This describes a different strategy involving partial borrowing at different times

Therefore, the correct answer is D: Borrowing in two months to finance a three-month investment.